Switzerland’s largest bank, UBS, agreed on Sunday to buy its longtime and besieged rival Credit Suisse for about $3.2 billion, the fiercest bid to stop Financial panic has swept the globe over the past week.
The deal, hastily brokered by the Swiss government over the course of several days, heralds the staggering demise of a 166-year-old institution that was once a symbol of Swiss pride. This is perhaps the most sweeping reshuffle of the global banking sector since the 2008 financial crisis, when once-financial giants were bought out by rivals to avoid catastrophic crises. .
Founded in 1856 to finance Switzerland’s rail network, Credit Suisse has risen to financial leadership, at one point on par with American giants like JPMorgan Chase.
However, the Zurich-based bank has also been shadowed by decades of scandals, upheaval in management and failed reform efforts that have damaged the bank’s reputation, attracting lawsuits and left banks reeling from losses. The recent decline in bank shares, fueled by the collapse of Silicon Valley Bank this month, has made its long-standing vulnerabilities clear and hastened the demise of the bank. it – shows how panicked investors are.
“This is a historic day in Switzerland, but frankly, the day we hoped for would not come,” Colm Kelleher, president of UBS, told analysts Sunday.
Swiss government leaders and regulators said on Sunday that the deal was the most effective way to reassure investors about the health of the country’s financial sector and the possibility of new developments. Its troubles spill over the border.
Karin Keller-Sutter, a member of the Swiss Federal Council, said at a press conference that UBS’ takeover of Credit Suisse “has laid the foundation for greater stability in Switzerland and internationally”.
Janet L. Yellen, Secretary of the Treasury, and Jerome H. Powell, Chair of the Federal Reserve, said in a joint statement: “We welcome the announcements made by the Swiss authorities today in support of stability. financial determination.
Under the terms of the deal, UBS will pay its 0.76 shares for each share of Credit Suisse, valuing it at around 3 billion Swiss francs, or $3.2 billion – a fraction of that its market value on Friday.
In order to financially support UBS to carry out this transaction, the Swiss National Bank has agreed to lend up to 100 billion Swiss francs. And Finma, the Swiss financial regulator, has taken some extraordinary steps to help UBS quickly eliminate its main competitor, including wiping out Credit Suisse’s $17 billion bond and eliminates the need for UBS shareholders to vote on the deal.
The deal was assembled in such haste that UBS told analysts it did not have time to fully model all the financial impacts of the Credit Suisse purchase.
As Credit Suisse shares and bonds have fallen in price over the past week, analysts and investors have increasingly speculated that the Swiss government will force the company to merge with UBS to avoid chaos. Indeed, several times on Sunday, UBS executives insisted that negotiations had been initiated by Swiss regulators.
Over the past week, as depositors withdrew billions of dollars of their money and other financial institutions transacted with banks, it became clear to regulators that Credit Suisse might not be able to stay open for business if no government or UBS takeover. said a person familiar with the negotiations.
Up until the last minute, neither side was sure if they could reach an agreement because they were far apart on the terms of the deal. On Saturday night, UBS offered to buy Credit Suisse for about $1 billion, but the bank’s board rejected that proposal, according to people familiar with the negotiations. Credit Suisse has argued that its real estate holdings alone are worth about that, another person familiar with the negotiations said.
However, UBS is the only viable pursuer as the Swiss government is ready to offer special protections provisions only available to a Swiss institution, according to one of the people familiar with the deal.
Credit Suisse has struggled to turn the tide in recent months, but two events last week contributed to its demise. The bank revealed on Tuesday that there were “significant weaknesses” in its financial statements. And it has been caught up in the wide and growing panic surrounding the health of banks. As shares of lenders worldwide tumbled following the collapse of Silicon Valley Bank and Signature Bank, markets became particularly wary of Credit Suisse.
Credit Suisse’s stock and bond prices fell sharply for the week, as did the cost of insuring the bank’s debt in the event of default, despite efforts by Swiss regulators to shore up confidence. of investors. On Thursday, Credit Suisse said it would mining a $54 billion lifeline from the Swiss central bank in hopes of averting disaster. However, on Wednesday, the Swiss government contacted UBS, asking the bank to consider buying Credit Suisse.
Credit Suisse has been several months in a ambitious turnaround effort meant downsizing the company, including pulling out much of its investment banking and cutting thousands of jobs and other costs.
As part of the deal, UBS will essentially shut down Credit Suisse’s investment banking, with the combined company’s operations in that area eventually accounting for no more than a quarter of its assets.
The dissolution of Credit Suisse is the latest consequence of the collapse of Silicon Valley Bank. Despite being a relatively mid-sized lender operating primarily in the United States, SVB’s rapid decline has reawakened investors and depositors to fear of the risks. potential is lurking for other institutions, especially as central banks raise interest rates to combat rising inflation.
Shares of bank stocks around the world plummeted last week, wiping out nearly half a trillion dollars in market value. Regulators and major lenders have taken extraordinary steps to avert a greater disaster, including by the largest US banks. leading the rescue of 30 billion dollars of the medium-sized First Republic Bank.
However, no international lender has been hit as hard as Credit Suisse, whose shares fell to a record low last week amid a steady stream of bad news.
The deal announced on Sunday signals the humble end of one banking symbol – and amplifies the power of another.
Founded in 1856, Credit Suisse has become a mainstay of Swiss finance. Meanwhile, UBS was born after decades of mergers among smaller lenders across the country.
Both companies cherished the dream of breaking into the global banking elite, and pursued that goal in large part by acquiring prominent American brokerage firms: Credit Suisse acquired First Boston and Donaldson, Lufkin & Jenrette, while UBS took over Dillon, Read.
The two eventually joined the ranks of top global banks, only to be badly hurt during the 2008 financial crisis by a failed bet on the US housing market.
But while UBS recovered, Credit Suisse struggled. The country wobbled from crisis to crisis, paying billions in fines for its involvement in a string of scandals, including traders manipulating foreign exchange markets, foreign bribery and drug laundering. . (One of its executives, Tidjane Thiam, was ousted because supervisory staff.)
And Credit Suisse has been stuck in embarrassing trading disasters, notably the $5.5 billion loss it tied to Archegos . investment company boom.
By the time Credit Suisse announced the turnaround initiative in October, investors and analysts were skeptical that — even under the new chief executive, the third in three years and with $4 billion new capital dollars led by the state-owned National Bank of Saudi Arabia – the bank can succeed.
But a flurry of bad news followed, including the revelation that Credit Suisse lost $147 billion in customer deposits in the last three months of 2022.
Then, the collapse of the Silicon Valley Bank, 5,800 miles away, sent shockwaves through the global banking sector.
Of even greater concern is the untimely development for Credit Suisse. On Tuesday, the company revealed that it had found “significant weaknesses” related to its financial statements, although the company said it had kept its accounting unchanged.
On Wednesday, the president of the Saudi National Bank, Ammar al-Khudairy, said that his bank would not invest more money in the Swiss lender. Mr. al-Khudairy later clarified that the move was for regulatory reasons, but investors remained fearful: If Credit Suisse tried to raise more capital, they could not expect participation. of the largest shareholder.
By Thursday morning, Swiss regulators had publicly confirmed the strength of Credit Suisse’s balance sheet, while the bank said it would take advantage of the Swiss central bank’s lifeline. But its stock and bond prices continued to fall, while the cost of insurance policies against the company’s default rose to alarmingly high levels.
Through Friday, analysts said continued eroding confidence in the company, despite the relative stability of its balance sheet, will force the company to take more drastic action.
In a way, Sunday’s deal is a boon for UBS, which cements its position at the top of Switzerland’s banking hierarchy and could strengthen its core asset management business. its core and won Credit Suisse’s highly regarded Swiss retail banking division.
Johann Scholtz, an analyst at Morningstar, wrote in an email: “The sum of Credit Suisse’s shares is much larger” than what UBS is paying.
But UBS is tasked with shutting down much of its rival investment bank, and it will face what will most likely be the layoffs of Credit Suisse staff.
Some analysts also raised the possibility that UBS would face lawsuits related to the takeover. Executives responded that some of the most contentious issues were decided by Swiss government regulators.
